Q2 | Torys QuarterlySpring 2023

Market practice for sustainability-linked loans continues its evolution

Sustainability-linked loans (SLLs) have gained significant traction in Canada and the U.S. in recent years. Since their market debut, the SLL market has grown to $747 billion, making it the second-largest sustainable debt asset class after green bonds1. While the key performance indicators (KPIs) and sustainability performance targets (SPTs) in these loan products are bespoke to each borrower, market practice has been developing around the criteria for the SLL product, the roles of the lenders in the development of this feature and the relevant credit documentation.

Since 2019, the Sustainability Linked Loan Principles (SLLP), developed by the Loan Syndications and Trading Association (LSTA), the Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA), have been providing guidance to the credit markets on the core components and criteria of the SLL product. In February 2023, both an updated SLLP and guidance document were released to the market, along with two first-of-kind reference documents to further facilitate the development of market practice:

  • model sustainability structuring agent engagement provisions; and
  • model SLL credit agreement provisions.

In this article we explore certain key takeaways from these reference documents.

As stated in the SLLP, an SLL can be any loan instrument with an economic impact to the borrower based on whether it “achieves ambitious, material and quantifiable predetermined sustainability performance objectives”. These loans aim to incentivize the borrower’s sustainability achievements using economic rewards—namely, an adjustment to interest rates and/or fees.

While not labelled as such, SLLs can be seen as a type of transition finance as the borrower transitions towards its sustainability targets.

There is no specific use of proceeds requirement for SLLs; typically, the proceeds of the loan can be used by the borrower for general corporate purposes. While not labelled as such, SLLs can be seen as a type of transition finance as the borrower transitions towards its sustainability targets.

The role of the sustainability coordinator or structuring agent

In the development of an SLL, a member of the lender syndicate (typically the arranger or an affiliate of the arranger) takes on the role of sustainability coordinator or sustainability structuring agent (SSA) to work with the borrower to agree on applicable KPIs and SPTs and monitoring and reporting requirements. In an effort to clarify this role, engagement letters with the arranger have started to include specific language relating to the SSA, and the LSTA drafting guidance offers some standardization for the market.

5 key features of SSAs

Five features of the SSA role that have developed in practice are highlighted in the drafting guidance:  

  1. Role is akin to the role of an arranger. The SSA has a limited advisory role to the borrower and does not have any fiduciary responsibility to the borrower, the lenders, the administrative agent or any of its stakeholders. It undertakes to use its commercially reasonable efforts to develop and structure the SLL features in the credit agreement as well as advise and assist the borrower in the establishment of the criteria for an SLL product but makes no assurances that the criteria will be achieved.
  2. Key services. While the model provision does not require setting out the scope of the services that may be provided by the SSA, the drafting guidance provides an outline of some of these key services, including assistance with:
    • the company in its selection and calibration of KPIs and SPTs;
    • communications with the lender group with respect to the SLL features of the loan; and
    • the determination of the sustainability performance pricing margin and fee adjustments.
  3. Termination of role. The model provision highlights that the SSA role is intended to terminate when the credit agreement documentation is finalized and executed; in other words, there is no ongoing role or responsibility for the SSA (unless the parties agree otherwise).

    Generally, administrative agents collect any ongoing KPI reporting on behalf of the lenders and manage the mechanics of adjusting the margin based on the outcomes of the KPIs. In addition, the SSA has the ability to resign from its role at any time. It should be noted that in “sleeping” SLLs (discussed below), the SSA’s role will not start until the borrower initiates the process to convert the credit facility into an SLL at some point after the closing date. In these cases, the SSA title should not be included on the cover page of the credit agreement until the SLL amendments are effective to reduce any chance of misrepresentation to the market.
  4. Consultation on SLL announcements. The proposed provisions provide a consultation right for the SSA with respect to any announcement by the borrower with respect to the SLL product. This provides the ability for the SSA to limit or prevent an announcement where, in the SSA’s view, the SLLP criteria have not been achieved by the borrower.
  5. Service fees. The drafting guidance includes a fee to the SSA for its services. As this role has developed, there has been some discussion between borrowers and SSAs as to whether a fee should appropriately be charged for the SSA service. The work of the SSA is pivotal in the development of the SLL and requires a lot of heavy lifting, including helping the borrower identify the right sustainability targets that are material and ambitious—as well as structure the loan in accordance with the SLLP. As such, market practice has developed to include a fee for this service.

Model credit agreement provisions

The drafting guidance with respect to the SLL provisions in a credit agreement includes all of the key elements required to implement an SLL feature in a typical U.S.-style credit agreement. These provisions will also work with most forms of Canadian syndicated credit agreements, which are substantially similar to U.S.-style agreements. One thing to note is that the LSTA has not included any guidance on the actual drafting or description of KPIs and SPTs. As noted above, KPIs and SPTs are bespoke to each borrower and are designed, developed and defined in relation to each borrower’s industry, challenges and sustainability plan. 

“Sleeping” SLLs

Notably, the model credit agreement provisions include proposed language with respect to “sleeping” SLLs. This term has been coined to refer to conventional loan agreements that include an ability to establish the features of an SLL (such as the KPIs and SPTs) at a later date. The SLLP has a clear statement that a credit agreement that includes an intention to set the KPIs and SPTs at a time other than inception does not qualify as a SLL until the SLLP requirements have been met.

Many market observers have raised concerns with sleeping SLLs becoming common in the U.S. and European markets and the related greenwashing risk; any disclosure with respect to any SLL component in a sleeping SLL or related marketing could potentially mislead the market into thinking that an SLL facility has been established (when in fact it has not) and equally undermine the credibility of the product. 

Amanda Balasubramanian (00:05): Sustainability-linked loans have surged in popularity over the past few years. Known as SLLs, these are loans where an economic outcome, such as a reduction in interest or fees, is linked to the borrower's performance of meaningful sustainability objectives. Against this backdrop, we're seeing the growth of so-called sleeping sustainability-linked loans. A sleeping SLL is essentially a conventional loan agreement that contains provisions, which allow the borrower to set key performance indicators and sustainability performance targets after the closing date. They’re referred to as “sleeping” because the sustainability aspect of the loan is delayed and activated at a later date. I'm Amanda Balasubramanian, co-head of the debt finance practice at Torys, and I'm here with my partner, Jon Wiener, from our New York office, to discuss the pros and cons of sleeping SLLs. Jon, why is it that we're seeing sleeping SLLs in the market?

Jonathan Wiener (01:04): The reality is that borrowers sometimes require capital before they are ready to establish meaningful sustainability KPIs or key performance indicators. Many borrowers would ideally like to set those targets from the start, but their ESG maturity level doesn't allow them to do that. Setting KPIs requires a lot of upfront work, particularly for a company that doesn't have a fully developed ESG infrastructure in place.

That's because KPIs need to be credible. They need to both be material to the borrower’s business and ESG strategy, and capable of being measured and benchmarked going forward on a regular basis. These realities often leave borrowers with a difficult choice. Either they execute an SLL now, but with less meaningful “or quantifiable targets (or potentially risk accusations of greenwashing if they rush and get things wrong), or they pursue a sleeping SLL with provisions that will be delayed but could be more meaningful. If the market thinks SLLs are positive and encourage better ESG behaviour from borrowers, then sleeping SLLs represent a way to encourage more borrowers to join in when they are ready to get it right. But sleeping SLLs have also received some criticism.

Amanda Balasubramanian (02:29): Yes. The issue is that a loan is not a sustainability-linked loan until the KPIs and the SBTs have been set, and the other requirements of the sustainability-linked loan principles have been reflected in the documentation. Even if the borrower fully intends to set those immediately after closing, the loan is still not considered an SLL until that happens. As a result, any marketing or disclosure about a sleeping SLL runs the risk of misleading the market if it is labelled as “sustainable”.

Transparency is so important for sustainability-linked loans as it is for all ESG initiatives. SLLs that are not legitimate could be considered greenwashing, undermining the credibility of the parties and the SLL market. The key is for no misrepresentation to be made by the borrower or the lenders, with respect to the nature of a sleeping SLL.

Jonathan Wiener (03:23): It does sound like the market is trying to find the right balance here. One interesting step in that direction was the LSTA guidance on sustainability-linked loan principles. On the one hand, the guidance provides more flexibility to borrowers by allowing sustainability targets to be set later with just a majority or required lender approval, which is meaningful as changes that affect pricing of a credit facility would typically need unanimous lender consent.

On the other hand, the guidance looks to build credibility in SLL products by clarifying that sleeping SLLs are only treated as SLLs when the KPIs are actually established and approved by the required lenders. The guidance suggests that sleeping SLLs should only be used for extraordinary circumstances and that the required lender approval of the KPIs should occur within one year of the closing date.

I would argue that the market is better served by having more sleeping SLLs and not just relegating this idea to extraordinary circumstances, and think that the one year limit is arbitrary. In any event, even without sleeping SLL architecture, any loan agreement can be amended to become an SLL post-closing with unanimous lender consent, and lenders are generally eager to hold SLL and other ESG loans, so that may not be a difficult consent to obtain. It's interesting to note that the LMA guidance from the English equivalent of the LSTA does not provide for sleeping SLLs, so others in the industry are clearly more skeptical.

Amanda Balasubramanian (05:10): It's a challenging balance to strike, and we welcome the efforts of the organizations behind the sustainability-linked loan principles and their related guidance to deal with key issues in the market. We expect the demand for SLLs to increase and the market to mature around both sleeping SLLs and SLLs in general.

Notwithstanding that concern, there can be circumstances where there is a mismatch between the timeline in which a credit facility is needed by a borrower and the time it takes to properly establish meaningful KPIs and SPTs. Some market participants have argued that rushing into an SLL in order to meet a timing need for the financing could lead to the borrower establishing targets that are not sufficiently ambitious or developed. Put differently, if the choice is between a less meaningful or potentially greenwashing SLL now or a thoughtful SLL later, those market participants advocate for the delayed provisions.

As such, the model credit agreement has proposed language to help market participants walk this narrow line. Borrowers benefit from the proposed provision in that it gives them some flexibility to convert the facility to an SLL. The proposed provision allows the KPIs and SPTs to be established later by an amendment that only requires majority or required lender approval (rather than unanimous consent which is traditionally required for any amendment that affects the pricing of a credit facility). In an attempt to minimize the concerns about sleeping SLLs discussed above, the guideline provisions require that any amendment with respect to the sustainability adjustment must be completed within one year of the closing date. We have seen deals in the market without the one-year limitation; there is an argument that the one-year limit is arbitrary and more time may result in more thoughtful KPIs and SPTs, depending on the specific facts applicable to a borrower.


The updated SLLP and model engagement letter and credit agreement provisions represent the latest sign of the continued growth in SLLs in the U.S. and Canadian loan markets. Many stakeholders view SLLs as a key step in helping both lenders and borrowers meet their increasingly ambitious ESG goals, and we expect to see continued growth of SLLs in the year ahead.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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